This is the intro from a Motley Fool Canada email I got yesterday:
“It looks like you missed a pretty huge announcement that Iain Butler, our Chief Investment Advisor, made just yesterday. Since this could be a massive catalyst for your portfolio, I wanted to send you one final alert to make sure you don’t miss out. Please note: This is extremely time-sensitive, so I suggest you read it in full ASAP!”
And that got a bunch of Gumshoe readers revved up, so I thought I’d take a quick look for you — even though, yes, it’s Friday and I’m spending most of the day finishing up the Friday File for the Stock Gumshoe Irregulars.
The Motley Fool loves to use terms like “double down” and “triple down” in its ads for some reason, and this latest one basically repeats a previous Motley Fool pitch that was extended to Motley Fool Canada back in April… only instead of a “triple down” they’re now saying that this signal they’re talking up is an “All In” Signal. The pitch is in an ad for Iain Butler’s Motley Fool Stock Advisor Canada (“on sale” for $99, aims to recommend one US and one Canadian stock each month).
The Fool has often highlighted the outperformance of stocks that have been selected by both of the Fool-founding Gardner brothers — so if Tom Gardner initially recommended Netflix (NFLX), for example, and David picked it a couple years later that’s a “double down” signal that the stock is unusually appealing. Here’s what the new ad from Motley Fool Canada says in adding Iain Butler to that pair…
“… a rare and historically very profitable stock buy signal is flashing right now.
“David and Tom Gardner and myself independently research and pick our own stocks – what David and Tom pick has nothing to do with each other, and the same goes for my picks – they’re completely independent of Tom and David’s research.
“However, every so often the three of us all land on the exact same stock.
“Many of our colleagues at The Motley Fool have come to call this uncommon occurrence the ‘All In’ buy sign.
“It’s rare that all three of us formally agree on the exact same stock, but when it has happened, the results have been spectacular”
The big one there is Shopify (SHOP), which was still a tiny and largely unknown Canadian tech company when Motley Fool Canada recommended it at about the same time that David Gardner picked it for his Rule Breakers service, in the Spring or Summer of 2016 (it’s up more than 2,000% since then — and yes, I can verify that because we covered their teaser ads for the stock at the time, Motley Fool Canada teased it a month or so before David Gardner did), but the ad also references MercadoLibre (MELI), which Butler says he joined the US-based Fool brothers in recommending in January of 2014 (that has been a Fool pick from David Gardner for much longer — if memory serves, he recommended it before the 2008 financial crisis).
So what’s this latest one?
“… none of us would ever describe this new “All In” stock as a ‘sure thing,’ but the details behind this tiny little internet company are undeniably impressive:
• It’s smaller than 1/100th the size of Google’s market cap.
• Each one of our recommendations of its stock are crushing the market.
• Its young CEO has already stockpiled $575 million since its IPO.
“This company stands to profit as more and more people ditch cable for streaming TV. And in fact, we believe this company’s crucial technology could represent the final nail in the coffin for traditional cable.”
Sound a little familiar? How about if we add this clue:
“… this company sits in the middle of the advertising market, which is more than 10X bigger than the online streaming industry.”
Got it? If not, you’re probably pretty new to Stock Gumshoe — we’ve covered this one and the Motley Fool’s teasers about it at least half a dozen times in the past few years. How about one more clue?
“In an interview with Tom Gardner and his team, this company’s CEO called the current moment ‘the most exciting in the history of advertising.’
“Of course, any CEO could say that simply to build up hype and push the company’s stock price higher … but this CEO is putting his money where his mouth is.
“He’s betting his fortune – $575,715,640 to be exact – on what he’s calling cable TV’s ‘ticking time bomb.'”
So yes, this “All In” report is not at all urgent or new… it’s almost exactly the same as the “Triple Down” alert that Motley Fool Canada was advertising heavily back in April. Yet another reminder that although we can learn about interesting ideas by digging into teaser ads, we have to essentially ignore the false urgency that they are always peppered with. Even that last specific bit of the tease is well out of date now, the $575,716,640 number that the Fool has been using for quite some time, since that CEO’s fortune in the shares of his company would now tally up at about $2.25 billion.
For those who are newer to the story, then, let me clearly confirm: This “All In” tease is pointing directly at our old friend The Trade Desk (TTD), which I’ve also owned for a couple years now and first learned about because of a teaser pitch from the Fool in October of 2017. It has been among the most heavily teased Fool stocks for three years now.
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The Trade Desk provides a data-fueled programmatic ad-buying software and access to data for purchasing (and monitoring) ads for the “open internet” (as opposed to the “walled gardens” of Google and Facebook), and they’re growing in all the areas that other advertising folks are growing, with huge volume in things like in-app advertising and mobile video, but they are also growing very fast in streaming — placing ads in services like Hulu, which they think is a major growth area (the argument being that advertising dollars will grow in importance for streaming services as they compete and as customer acceptance of higher and higher subscription fees to fuel content creation will be limited).
They’re not really a “Netflix killer,” though they’ve been teased as such from time to time — except in that their offerings in streaming ads might help to build ad-supported streaming services that could pressure Netflix (like the free version of Hulu, for example, or the newer Peacock service from NBC), and they’re not a publisher, they provide software and services to the “buy” side of the advertising market. Their customers are major advertisers and ad agencies, and they place themselves in the middle as a disinterested gatekeeper — they don’t own the content, and can provide data to help advertisers automatically place their ads alongside the best content.
They’ve grown like mad since the Fool started pitching them, and since I started covering (and owning) the stock, though there have also been some meaningful dips along the way — I haven’t added to my position in a long time and have taken some profits along the way, but it’s still a top ten holding in my Real Money Portfolio and I still like the company’s long-term potential.
Here’s what I wrote about this company to the Irregulars in my Friday File two weeks ago, when the stock had just hit new all-time highs at about 50X sales.
10/16/20: The Trade Desk (TTD) comes to mind mostly just because I did not expect that stock to get to a valuation of 50X sales like it nearly did at the peak this week, that seems stupid… but I also felt that the valuation was getting out of hand at 20X sales and sold 10% of my position then, and therefore I left a chunk of profit on the table. Since the last time I sold a little bit, on February 7 as part of my Annual Review of all of my positions, TTD shares are up about 125%.
And that’s in what has been and will probably continue to be a relatively bad year for the company — this isn’t a direct beneficiary of the pandemic, to some degree it’s really been a victim of COVID-19 (so far) because of falling advertising budgets. The Trade Desk’s customers are ad agencies and major advertisers, and those advertisers spent a lot less in the second quarter than they did in the second quarter of 2019, especially the 10-15% or so of the ad market that is focused on things like Hollywood blockbusters, travel and tourism, and other snakebitten segments of the economy. So TTD’s expenses stayed on their rapid growth trajectory, their spending was still up sharply over last year… but the revenue didn’t keep up, and in the second quarter they lost money for the first time since they went public. And yet, the shares still rose another 30% over the past couple months… and analysts do still think that advertising will bounce back sharply, and they anticipate something like 15% revenue growth for all of 2020, (with profit of about $3.48 per share, down only slightly from $3.69 in 2019)… with a resumption of 30%ish revenue growth after that.
So what kind of valuation does that support? Are you ready to pay 100X 2022 earnings for a company with ~25% earnings growth? Confident that ad spending will rebound strongly, and continue to grow? You’ll still have to pay more than that if you want to buy TTD today, sadly, it’s trading at about 120X 2022 earnings estimates (people are using price/sales ratios a lot more often for these high-growth cloud names, and on that front TTD is also certainly pricy — 43X trailing revenues, 28X 2021 revenue estimates). Buying here is really a vote of confidence in the future, at a time when the actual business is not doing particularly great. We’ve seen both analyst upgrades and downgrades this week as folks try to figure out how to read the tea leaves on TTD, and I confess I feel sympathetic to both the bull and bear cases here, it depends on which I’ve read most recently.
TTD doesn’t report until November 5, so we’ll see how things go. If we go off on another tear higher here I’m likely to be tempted to shave off a bit of profit again, but I’m also likely to continue to hold a meaningful stake in TTD for a long time, given their leadership in this business and their still-small share of the market….
TTD is much more levered to TV, streaming video and regular digital ads than it is to the social media platform spending, so that’s another area of concern as Facebook and YouTube suck in an ever-expanding share of ad spending… but it’s also true that their slice of advertising spending, programmatic and data-driven ads, is still growing its share of the overall ad spending market very fast, so although that clearly doesn’t make up for terrible quarters, it surely helps. Ad spending in the second quarter overall might have dropped 30%, but TTD’s revenue fell by only 10%. Alphabet (GOOG) saw quarterly revenue grow by only 10%, its worst quarter in my memory, and Facebook was roughly the same, so clearly there’s a lot of money going into advertising even if some big chunks of the market dropped meaningfully. O
n the more traditional side of the business, big ad agency Omnicom had revenues drop by 25% and Interpublic by 20%, so TTD is kind of slotted in the middle there — as makes some sense, since those big four ad agencies (Publicis, WPP, Omnicom and Interpublic) include some major TTD ad-buying and planning customers among their networks of agencies, and those ad agency groups together probably accounted for close to 50% of TTD’s revenue in 2019. I would assume that the ad spending overall in the third quarter will also come in short of last year, at least if you exclude political ads, since the recovery is generally expected to be pretty gradual… but you never really know.
And if you’re wondering what the size of the market is, as technology continues to encroach more and more on the traditional ad buying and ad-planning process, we might note that the gross profit for those four ad agency groups, taken together, is probably on the order of $10-12 billion a year (not revenue, but gross profit – revenue is closer to $60 billion). That’s a huge market just for ad agencies, and TTD’s revenue for this year will probably come in at only about $750 million, so that reminds us of how relatively small they still are in the context of the global advertising business.
And, of course, if you include the massive revenue from the big internet companies, the size of the advertising marketplace truly balloons — Alphabet and Facebook alone bring in $250 billion a year in revenue, the vast majority of it (80%+) in advertising dollars. The growth opportunity is clearly there for TTD — whether or not they can continue to wrench away more and more of that ad spending onto their programmatic platform, and sell their management software to advertisers, is an operational question, and the next billion dollars will probably be harder to come by than the first billion… but it’s clearly a market where they have so far taken only a small bite. That’s hard to conceptualize for a company that has a $30 billion market cap and has seen its stock rise by almost 2,000% since going public four years ago, but it is still conceivable, at least to me, that The Trade Desk can grow to 10X this size over the next decade.
If that happens, I’m sure I’ll have sold some more along the way — but not today. Today I resisted the urge, partly because I had already done that little downshift in my momentum exposure through some minor selling in other names. You can feel free to come back to this and remind me if that turns out to have been a mistake.
This week we know a little more than we did two weeks ago, since Google, Facebook, Twitter and a few of the big ad agencies have now reported — and on the top line, at least, the news has been generally encouraging, so I’d be slightly more optimistic about TTD’s near-term prospects than I was on October 16. The advertising industry has not fully resumed a real growth trajectory as a whole, but it has all bounced back strongly from that awful second quarter — and the digital parts of it have bounced faster, with Google in particular reporting blowout numbers that provide some reassurance. If people are back to spending heavily on YouTube and Google search ads, they’re probably also spending more on other digital advertising… and we’ll probably see that in The Trade Desk’s numbers next week. Whether that has an impact on the share price, course, is yet to be seen, but I would guess that the analysts are underestimating TTD’s revenue for the quarter by probably something close to 10%. Analysts also expect earnings to come in well below last year, with the estimate being about 48 cents in earnings per share, and I’d guess that will turn out to be on the low side, too, given the strength we’re seeing in other ad businesses… but again, that’s all guessing, and investors have already bid the stock up by another 25% or so since last quarter, so clearly folks are betting on a pretty strong recovery.
Jeff Green, by the way, is the founder and the guy who the Fool often says has “bet $500 million” or, in this particular ad, “betting his fortune – $575,715,640 to be exact” on this company… but that’s an odd way to put it. He has his fortune almost entirely because he started the company, so he started with a large equity stake in The Trade Desk when the company was born, and has added to that by earning millions of dollars worth of options in TTD shares each year. He sells stock very regularly, though he gets so many options that he is also still seeing his stake grow over time — so yes, he does have his fortune largely in TTD shares still, and he’s a passionate believer in the opportunity laid out before his company, but it’s not like he’s buying the stock today, or betting on a particular price. In addition to still having a lot of stock options outstanding, with millions more added each year as part of his CEO compensation, from the latest SEC filing it looks like he owns about 3.8 million shares today — which should actually be worth roughly $2.25 billion at a $600ish share price. He owns both Class A shares and the supervoting Class B shares that give him more voting control, so I’d have to dig deeper to get a real count… suffice to say that he’s not going to be hurting no matter what happens to TTD stock in the next few years, but he certainly does have “skin in the game” as a large shareholder… and that’s nice to see even if he’s not actually buying shares.
The stock is not cheap, so for most cautious investors it’s not an easy buy even at $200, let alone the $650 price they hit a few weeks back… but if they keep doing things right they’ll keep growing into that valuation and moving the yardsticks, so it’s not likely to ever be cheap enough to be “easy.”
Whether it will work out for the stock in the near term, well, we’ll see — I give this one a lot of rope, but it also trades at about 150X forward (2021) earnings, and even though it’s mostly a nicely scalable software business, the growth was widely expected to “decelerate” even before any impact on the advertising market from the coronavirus (they’re still seen as doubling revenue from 2019-2022, but spending heavily and not quite doubling earnings in that time), so there’s not a lot of cushion there for panicked investors to count on. On the other hand, apparently the Fool keeps trotting this out as a favorite for their Stock Advisor subscribers, a group that I think numbers close to half a million people now, and as of earlier this y ear you can add Stock Advisor Canada to that list, so that probably helps with the “buy the dip” response from investors whenever things get a little less rosy… at least for now.
And that’s all I’ve got for you on this one… I know a lot of you are TTD shareholders, so if you’ve got a comment to share, or an opinion on where things will go for them this year, or even next quarter when they report what the “bounceback” was like from the Q2 slowdown, feel free to toss it into the friendly little comment box below. Thanks for reading!
Disclosure: I own shares of and/or call options on The Trade Desk and Google parent Alphabet among the companies mentioned above. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.